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Microcap & Penny Stocks : PanAmerican BanCorp (PABN) -- Ignore unavailable to you. Want to Upgrade?

To: ISOMAN who wrote (35362)	5/4/1999 10:47:00 AM
From: Observer	Respond to of 43774

isoman Sorry you saw my last post a bazillion times. Here's an article I found on RB. =============================== Who's Paying Who? May 3, 1999 - 2:10 PM By Joe Contrada - Chat with Joe on his message board. The Securities and Exchange Commission recently announced plans to determine the cause of the much-publicized downtime at the Web sites of various online brokers. In the process, Arthur Levitt & Co. should take a serious look at what caused the sites' tremendous surge in orderflow, a primary cause of the system failures. A major reason for the volume increase is the ridiculously low commissions which most of the onliners charge - bargain basement rates they're able to offer because the firms "sometimes receive payment for customer orders". The online brokers claim the practice of selling customer orders allows them to offer outstanding execution services at increasingly competitive rates; i.e., they're doing the public a favor. At the same time, the firms attempt to make such revenue appear insignificant by referring to it as the "penny or two" that they "may" receive. Whether it's a penny, two pennies or something in between, the total is far from insignificant. The average investor would be amazed to learn just how much payment-for-orderflow revenue these discounters receive from third-market firms, Nasdaq market makers and regional stock exchanges. When you multiply 1 cent or 1 1/2 cents times the tens of millions of shares that discount brokers execute each month, you get a total that makes it easy to understand how and why the online brokers dearly value their relationships with the firms that ring the cash register for them. The valued relationship between the brokerage firm and the execution center is where the real problem lies for the public, and it's a relationship the SEC (despite its efforts) doesn't really understand. The various execution centers aren't doing anything illegal. They're simply getting what they pay your discount broker for - the opportunity to make money by selling a stock listed on the New York Stock Exchange. They sell it in the third market as principal; they sell it at a price represented by "the best displayed offering", even though the stock is trading 1/16 or 1/8 below that; and they sell it at a price where they can likely buy the stock back shortly after selling it to you. When your cyberbroker directs your orders in this fashion, it allows the orders to be executed in a dealer environment rather than an auction environment. The dealers, acting as principal, do not make money the same way that specialists in the primary markets do, by executing as agent and charging a commission. They make their money by carefully and quietly taking full advantage of retail orderflow made available to them by your broker. The advantage may take the form of only 1/8, 1/16 or 1/32 of a share. But that's 1/8, 1/16 or 1/32 which could have gone into the unsuspecting customer's pocket if the discounter wasn't so willing to close its eyes to an inferior execution for the sake of some extra revenue. In this context, it is easy to understand why market makers prefer market orders to limit orders. Retail limit orders, if displayed as required, reduce to essentially zero the probability of the market maker earning any money from the order. Because market makers prefer market orders to limit orders, they will pay your discount broker more for a market order than they pay for limits. That is precisely why many discounters charge you less for market orders. They're more than making up for it at the other end. If you think your average deep-discount cyberbroker is doing you a favor by selling your orderflow to keep your commissions low, consider this; Cyber Discount Broker ABC charges you $9 for a market order to buy 2,000 shares which he sells to a third market firm for 1 1/2 cents per share. He gets nine bucks from you and 30 from the third market firm. If your execution price is just 1/32 higher than it should have been, your real cost of execution jumps from $9 to $71.50 real fast! Given the fact that the market maker is paying your broker three times as much as you pay, which relationship do you think your broker is likely to care most about?